Wolfman's Law

Consider the facts of the following case, drawn from Sharp v. Coopers & Lybrand, 457 F. Supp. 879 (E.D. Pa. 1978):

Plaintiffs, investors in an oil drilling venture, alleged in this class action that the defendant, a major accounting firm, is liable to them for misstatements in several opinion letters which advised them as to the supposed tax consequences of those investments....

We certified a class consisting of all persons who purchased these securities after July 22, 1971, 70 F.R.D. 544 (E.D. Pa. 1976). There ensued an apparent novelty in our jurisprudence: a jury trial of issues common to the class under the Rule 10b-5, §20(a) and pendent claims. These issues included foreseeability of damages, the exercise of reasonable care, whether there were misrepresentations and omissions and, if so, their materiality and scienter, and whether the defendant controlled an employee for §20(a) purposes and adequately supervised him....

Plaintiffs are persons who purchased limited partnership interests in oil wells to be drilled in Kansas and Ohio, of which Westland Minerals Corporation (WMC) was general partner and promoter. As a result of criminal fraud by WMC, many of these wells were never drilled and much of the invested money was diverted to WMC's own use. Economic Concepts, Inc. (ECI), the selling agent for these limited partnerships, and WMC sought to engage in April 1971 the services of defendant in rendering opinions as to the federal income tax consequences of these limited partnerships. In July the defendant [agreed to draft the opinion letters. An] opinion letter signed by a Coopers & Lybrand partner in its name [stated] that "based solely on the facts contained [in the Limited Partnership Agreement] and without verification by us" a limited partner who contributed $65,000 in cash could deduct approximately $128,000 on his 1971 tax return.... The letter was written specifically for the use of one Muhammed Ali, a potential WMC investor, with regard to reducing the amount of taxes that would be withheld from a fight purse....

The jury found that the ... letter contained both material misrepresentations and material omissions, and that Higgins [a tax supervisor employed by Coopers & Lybrand who worked "directly under the supervision of four partners of defendant"] acted either recklessly or with intent to defraud in preparing the letters. Much of the evidence concerning those misrepresentations and omissions and their recklessness came from plaintiffs' expert witness, Professor Bernard Wolfman of the Harvard Law School, a specialist in federal income taxation. Most of his testimony was not rebutted by the defendant. Professor Wolfman explained the principles behind this tax shelter: a taxpayer who in 1971 contributed $25,000 to a partnership involved in a bona fide oil drilling venture, which then obtained for each $25,000 contribution an additional $25,000 bona fide bank loan that was fully secured by partnership property (the as yet undrilled wells) and then expended all of that $50,000 for drilling, could under the law applicable in 1971 deduct the full $50,000 from his taxable income. The effect would be to accelerate the tax deduction available to the investor in 1971. Professor Wolfman's expert testimony in concert with other evidence provided the basis for the jury's findings that the ... letter misrepresented or omitted to state material facts in at least three ways....

Professor Wolfman testified that writing such a letter was reckless on its face in that it omitted to state that the non-recourse loan which the letter assumed lending institutions would make to WMC, the value of which loan would be deductible by the taxpayer according to the opinion letter, would have to be secured by collateral (i.e., the oil wells) whose value was equal to or greater than the amount of that loan. Non-recourse loans of the type contemplated by the opinion letter (i.e., with no personal liability to the limited partners) are very rarely entered into by banks for oil drilling ventures, according to Professor Wolfman, because it is hard to secure them fully by undrilled wells, whose value is not known. Unless the value of the property used by the partnership to secure the loan were equal to the amount of the loan, Professor Wolfman explained, the amount of the loan would not be deductible to the limited partner under §752(c) of the Internal Revenue Code. To assume this unlikely fact that the loans would be thus secured without stating the assumption was itself reckless, he said.

(1) Should Professor Wolfman have been allowed to testify as he did?

(2) Suppose the case were criminal. Should the prosecutor be allowed to call Professor Wolfman to explain to the jury why what the defendant did was criminal? (That sort of "explanation" is called "teaching" in Professor Wolfman's regular line of work.)

(3) Would it make more sense for Professor Wolfman to be called as a court-appointed expert under Rule 706?

(4) If Wolfman is allowed to testify, what sort of evidence should the defendant be allowed to introduce to counter it? Who resolves any conflicts between Wolfman's testimony and the rebuttal evidence?

(5) Would it be better for judges simply to instruct jurors on the law after considering the arguments of counsel on proposed instructions?